‘Renewables remain resilient’: CalPERS’ Cashion on the outlook for US climate investing under Trump

The meeting with Peter Cashion is overshadowed by events. While we speak, large parts of Los Angeles are still in flames. CalPERS’ main office in Sacramento, some 400 miles north, is unaffected by the wildfires, but the events are clearly on his mind.

At the time of writing, 28 people have died, some $350m in public infrastructure has been destroyed, not to mention the homes lost and the damage to surrounding nature, which is inevitably harder to quantify. There could not be a more poignant time to discuss the need for the largest public pension fund in the US to tackle climate change.

When asked whether the wildfires will increase political awareness of the climate crisis, he gently dodges the question, stating that he “couldn’t speculate on the political impact of the fires”. It is easy to see why: the conversation takes place against the backdrop of Trump taking office and immediately pulling the US out of the Paris Agreement for a second time. Outspoken climate activism is hardly in vogue in the US right now.

With 2.2 million members and some $502.9bn in assets, CalPERS is the largest public pension fund in the US, and its climate targets are closely watched by both sides of the political spectrum. On the right, it stands accused by Republican politicians of participating in a “woke ESG cartel” due to its participation in climate alliances such as CA100+. On the left, which includes some of its members, there are mounting calls to do more on climate and divest its existing fossil fuel holdings.

In this context, CalPERS announced towards the end of 2023 its commitment to invest $100bn in climate solutions by 2030, in a bid to halve the carbon intensity of its investment portfolio. While the commitment applies to both listed and unlisted markets, CalPERS had already some $47bn in what it described as low-carbon assets at the time of the announcement. This has since been scaled up to $53bn, the fund announced towards the end of last year, including a partnership with Brookfield to invest in FirstEnergy Transmission and the acquisition of a stake in UK clean energy firm Octopus.

The bulk of the existing investments in climate solutions are in listed equities, corresponding with CalPERS’ overall strategic asset allocation—some 40% of its portfolio is currently invested in shares. Cashion is keen to stress that the main incentive for the increased allocation to climate solutions is “alpha generation” rather than a mere focus on emissions reductions, describing the energy transition as a great opportunity that required focus.

Defining climate solutions – a work in progress

From the outset, CalPERS has defined climate solutions as assets which either contribute to mitigation of emissions (renewable energy, for example), adaptation (heat-resistant cars, reinforced infrastructure) or transition assets from brown to green, such as utility providers transitioning from coal-based power generation to renewables.

However, in December, CalPERS CEO Marcie Frost shared that the fund has slightly adjusted its definition of climate solutions. What is behind the change in thinking?

“Previously, we assessed energy companies’ contributions by looking at both green revenues and green patents. However, patents are a future measure and may not materialise into decarbonisation outcomes for years. Now, we focus solely on green revenues, which reflect current contributions,” Cashion explains. He acknowledges that the inclusion of patents could risk overstating the contribution of some companies towards decarbonisation. But CalPERS also stresses that evolution in methodology has not changed the fund’s fundamentals in baseline climate solution totals.

CalPERS’ method for identifying climate solutions, though not uncommon, could draw criticism from climate activists because it includes fossil fuel companies who dedicate a certain percentage of their revenue to renewables. What would some of CalPERS’ more climate-conscious members make of the inclusion of companies such as Shell and Exxon in the fund’s climate solutions portfolio?

When pressed on this, Cashion remains calm, reiterating that he felt “comfortable with the approach. Activists may challenge the inclusion of companies like Shell in our climate solutions portfolio. However, our approach is transparent: we assess their contribution to the transition proportionate to their revenues from low-carbon activities.”

Targeting transition strategies

This approach might raise the question of whether investors should take a more proactive stance on transition strategies. If a company committed 95% of its CAPEX to fossil fuels and only 5% to renewables, can it really be classified as a climate solution?

Cashion argues that stewardship could play an important role in pushing for better transition plans. “We engage actively with large energy companies, advocating for awareness of physical and transition risks. Through initiatives like Climate Action 100+, we vote against directors in companies with insufficient climate action,” he stresses.

In addition, CalPERS has also developed a Climate Transition Index in cooperation with FTSE, which launched in July 2024. While the fund keeps an equal weight to the oil and gas sector, it differentiates between companies with relatively more or less credible transition plans and overweighs companies which it deems to be better positioned to adapt to climate change. Some $5bn of CalPERS equity holdings are invested in the strategy.

The level of disclosures produced by companies could soon be improved, with SB 253, the Climate Corporate Data Accountability Act, coming into force in January next year. The new rules will force firms with more than €1bn in revenue doing business in California to disclose not just their Scope 1 and 2, but also Scope 3 emissions. The framework could set an important precedent for US emission disclosure standards. Cashion welcomes the proposals: “We support climate disclosure and actively back California legislation and the SEC’s efforts. Even if disclosure requirements don’t proceed, we’ll promote voluntary disclosures through standards like ISSB,” he says.

But there is another piece of regulation which CalPERS is more sceptical of—the proposals to force Californian public pension funds to divest from fossil fuels. The fund’s leadership has in the past spoken out against such proposals, and Cashion reiterates that divestment, an option chosen by some of its peers, including New York State, is not on the cards for CalPERS but adds that the Climate Transition Index offers an opportunity to reduce allocations to some companies.

Private market opportunities 

Turning to private markets, Cashion stresses that he continues to see strong opportunities across private equity, credit, real estate and infrastructure, predominantly due to the climate transition. “Infrastructure, in particular, is capital-intensive, offering significant investment potential in transitioning from brown to green,” he emphasises.

Another opportunity is take-private transactions, he adds, referring to listed companies which trade below their fundamental value and are looking to take their business private, a trend which is accelerated by share prices for listed renewables firms declining, he explains. CalPERS is currently exploring the opportunities with its managers.

Political pushback under Trump

This leads us to the elephant in the room: the impact of Trump’s presidency on the outlook for the US energy transition. Only days after taking office, Trump initiated the US’ exit from the Paris Agreement and halted more than $300bn in clean energy infrastructure spending, according to a Financial Times analysis.

Cashion remains remarkably upbeat about the direction of travel for the US. “Renewable energy remains resilient due to its cost efficiency compared to fossil fuels and the increasing energy demand driven by factors like AI and domestic manufacturing,” he believes.

Yet he also acknowledges that there are challenges ahead: “The incoming Trump administration presents some uncertainty, particularly with the potential rollback of significant parts of the Inflation Reduction Act. For instance, electric vehicle tax credits and the Department of Energy’s loan guarantee program could be at risk. Sectors heavily reliant on these supports may face higher funding costs or reduced access to financing. However, we’ve always invested assuming no subsidies, ensuring our strategies remain robust,” he says.

“One advantage we have as long-term investors is the ability to wait and assess opportunities strategically. For instance, if sectors face short-term challenges due to policy changes or market conditions, we can adapt our strategies over time without being forced into immediate decisions,” he concludes.

More on this:

'CalPERS won't back down on climate' CEO warns ahead of Trump's return

CalPERS reveals further details of its $100bn climate investment pledge